Uber, Lyft, and similar rideshare companies represent a direct threat to state-controlled taxi cartels and their (increasingly unsellable) medallions. Now a class action lawsuit against Uber has been cleared for a federal court jury in California, alleging that its drivers should be classified as employees rather than independent contractors. If so, Uber potentially could owe millions of dollars in unpaid payroll taxes at both the state and federal levels (not to mention penalties) going all the way back to 2010. This could represent a death blow legal precedent for every company using the rideshare model.
These kinds of suits (ostensibly motivated by drivers who want the “benefits” of being treated as employees) represent judicial revenge by rent-seeking taxi companies. They desperately want to quash maverick rideshare startups, startups that dared provide a market solution to an age-old problem: how to get a taxi in the suburbs.
The IRS test for determining whether workers are properly classified (for payroll and withholding tax purposes) as employees or independent contractors is based on a “facts and circumstances” test, applying 20 factors. Federal courts have developed their own similar criteria in various cases. But the general inquiry goes to the degree of control companies like Uber exercise over drivers’ work schedule, environment, and decision-making. And it is by no means clear that Uber will prevail in demonstrating that it allows drivers the degree of autonomy necessary to avoid being classified as employees. If not, Uber will be subject to the awful panoply of taxes and regulations that deter rational companies from hiring employees in the first place.
